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Unsecured Loans Beset South Africa

Unsecured Loans Beset South Africa

From WSJ

When in 2011, Maria Cristina Erasmus wanted to fix up her house, the 63-year-old retiree took out a bank loan of 50,000 South African rand ($4,465). When she wanted to buy furniture, she borrowed more.

Mrs. Erasmus and her taxi-driver husband offered no collateral but agreed to pay 30% annual interest—about four times the country’s average lending rate. Now, she can’t repay the 100,000 rand that is owed.

“We moved to a cheaper house, but we couldn’t do it,” Mrs. Erasmus said. “We were left with nothing after repaying the loan each month.” In July, the Erasmuses hired a debt-management consultancy to restructure their loan after defaulting on it.

The bad loan from the institution that lent Mrs. Erasmus the money, African Bank Ltd., is a small drop in a bigger bucket of trouble for South Africa’s banking system. The problems are amounting to a subprime-loan crisis for the country, home of the continent’s most sophisticated banking system.

Today, the $14 billion market for unsecured personal loans accounts for about 11% of all loans in the country, according to the national regulator, having quadrupled over the past six years. And the debt is festering fast. As of March of this year, about a quarter of unsecured loans were nonperforming, meaning that they hadn’t been repaid in three months or more, up from 14% in March 2012. The default rate in the past six years has hovered around 16%, but jumped almost 10 percentage points in 2014.

The lender the Erasmuses dealt with, African Bank collapsed in August, ringing alarm bells about the murky world of unsecured lending, or high-interest personal loans not backed by collateral like a house or a car.

The country’s central bank has managed to shutter the failed African Bank and avert a panic, but it hasn’t been able to prevent a large bad-debt pile from getting larger.

Read more at WSJ